Wednesday, February 17, 2010

Walgreen to buy NYC drugstore operator Duane Reade

DEERFIELD, Ill.  Walgreen Co. said Wednesday it has agreed to buy the drugstore operator Duane Reade in a move that will more than quadruple the number of stores it has in the New York City metro area.Walgreen, the nation's biggest drugstore operator, said it would pay about $623 million for Duane Reade Holdings Inc., which is the biggest drugstore chain in the city. Including $457 million in debt held by Duane Reade, the transaction is valued at $1.08 billion.

Duane Reade, which has been operating in the New York area for 50 years, is owned by a group that includes affiliates of the buyout firm Oak Hill Capital Partners. Walgreen said Duane Reade's sales totaled about $1.8 billion in 2009.

The deal, which requires regulatory approval, would include all 257 Duane Reade stores, along with the corporate office and two distribution centers. Most of those stores are in Manhattan, where Walgreen currently has 13 stores.

Walgreen, based in Deerfield, Ill., operates 70 stores in the New York area and had 7,162 stores overall as of Jan. 31. The company opened a new store in Times Square in 2008, but said it would take many years to match the amount of stores and the quality locations Duane Reade already has.

Walgreen said Duane Reade stores will keep their name after the deal closes, and it will decide over time on how to combine the two brands.

The deal unites two chains that are in transition. Walgreen is trying to improve sales by converting hundreds of stores to a new layout, and Duane Reade has done the same with 30 of its stores. Walgreen suggested it could get new ideas from Duane Reade. It plans to continue renovating Duane Reade stores, and all of them should be converted to the new format in four or five years.

Walgreen also praised Duane Reade's FlexRewards customer loyalty program, its private label products, and its "store within a store" Look Boutique section, where cosmetics and skin care products are sold in an area that looks more like a department store than a drug store.

Some analysts feel Walgreen is struggling to sustain its sales while making changes to its store layouts and its array of products. It plans to convert 3,000 stores by fall 2010.

The company will fund the buyout with existing cash and expects the deal to close by Aug. 31, the end of its current fiscal year.

Walgreen expects the deal to cut its profit by close to 10 cents per share in fiscal 2010 and by about 3 cents per share in fiscal 2011. The buyout will cut costs between $120 million and $130 million by the third year.